New tax legislation enacted at the end of 2019, the Taxpayer Certainty and Disaster Tax Relief Act, extends several tax law provisions that had officially expired or were about to expire. Notably, the new law extends the special tax credit employers can claim for providing paid family and medical leave to employees.
The family and medical leave credit was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 and was supposed to last only through 2019. But thanks to the new legislation, your organization can take advantage of this tax break through the end of 2020.
What It Takes to Qualify
To qualify for the credit, employers must have a written policy in place that meets certain requirements. You need to provide at least two weeks of paid family and medical leave annually to all qualified employees who work full-time (prorated for employees who work part-time). Also, employees must receive at least 50% of their regular wages while on paid leave.
A written policy is in place on the latter of its 1) adoption date or 2) effective date. Let’s say you adopt your policy on June 15, 2020, with an effective date of July 1, 2020. Assuming you meet all the other requirements, you may claim the credit for wages paid for qualified family and medical leaves taken by qualified employees on or after July 1, 2020.
The credit applies to workers you’ve employed for one year or more and whose compensation for the prior year falls under a certain threshold. The threshold can’t be more than 60% of the annual indexed figure for a highly compensated employee (HCE). For employers claiming the credit in 2020, the threshold is 2019 compensation of $75,000 (60% of HCE amount of $125,000).
Determining what types of paid leave qualify for the credit is easy: They’re the same as qualified events under the Family and Medical Leave Act (FMLA). Employees can take paid leave:
- For the birth of a child and to care for the newborn.
- To welcome an adopted or foster child into their family.
- To care for a spouse, child or parent with a serious health condition.
- Because their own serious health condition means that they can’t perform their job.
- If a spouse, child or parent goes on covered active duty (or has been notified of an impending call or order to covered active duty) in the Armed Forces.
- To care for a spouse, child, parent or next of kin who is a service member.
Paid vacation, personal or sick leave benefits unrelated to any of the events listed above are not covered under the FMLA and don’t qualify for the tax credit. Also, you can’t include any leave paid by your state or local government or required by state or local law when calculating the amount of paid family and medical leave you provide employees.
Calculating the Credit
The value of the paid leave tax credit ranges from 12.5% to 25%, depending on the amount of wages paid. You’ll use the 12.5% figure if you pay the minimum 50% of the employee’s regular pay rate. The credit increases by 0.25% for each percentage point paid over 50% of regular wages, up to the maximum 25%. So, for example, if your company pays Elizabeth Jones 70% of her regular salary on wages of $30,000 for three months, it’s eligible for a credit of $5,250 (17.5% of the wages paid during the paid leave). You may claim the credit for up to12 weeks of paid leave per tax year. Note that “double-dipping” isn’t allowed. You can’t claim the family and medical leave credit for wages paid and also deduct the wages as regular business expenses. It’s one or the other (although in most cases, credits are more valuable than deductions).
For More Information
You can learn more about the family and medical leave credit on the IRS’s website. Or talk to your tax advisor about this and other tax breaks available to employers.